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Impact of corporate tax on small businesses and start-ups

Law has provided benefits to small businesses and individuals

The UAE Ministry of State for Financial Affairs has introduced a significant development affecting small businesses and corporations. Ministerial Decision No. 73 of 2023 offers tax relief for qualifying small businesses as part of the Federal Decree-Law No. 47 of 2022 on the taxation of corporations and businesses.

The corporate tax law has provided benefits to small businesses and individuals that generate annual revenues of up to Dh3 million. These entities will be eligible to benefit from small business tax relief, which will be available for financial years beginning on or after June 1, 2023. The aim behind small business relief is to support small businesses that provide goods and services and operate within the UAE.

While the relief offers considerable tax advantages, it comes with specific conditions. A resident business should neither be part of a multinational enterprises group (whose consolidated annual turnover is over Dh3.15 billion) nor a qualifying free zone person to be eligible for this relief. Businesses that apply for the small business relief need to be aware about the regulations of tax losses and net interest expenditure as such businesses can’t carry forward any tax losses or net interest expenditure incurred during the relief period to future tax periods.

These amounts can only be carried forward to periods where the small business relief isn’t in effect. The ministerial decision also includes a safeguard (GAAR) against businesses artificially splitting their operations to fall within the revenue threshold. If any business does this to avail of the small business relief, it’s will not be eligible to gain a corporate tax advantage, as this will not be permissible. Further, rules of exempt income will not apply to businesses that have elected for small business relief.

This means all income, even if it is not taxable, must be included as part of total revenue when a resident person calculates its turnover for small business relief purposes. Businesses normally can benefit from relief where assets and liabilities are transferred within a qualifying group.

However, these reliefs are not available to small businesses in the tax period for which they elect for small business relief. The introduction of corporate tax may considerably affect small to medium sized companies profitability and available funds for expansion, investment, or other business activities.

The introduction of corporate tax will also increase the administrative burden for companies as they will have to establish internal systems and processes to track taxable activities, maintain accurate records, and file tax returns with the appropriate authorities in the UAE. Therefore, it is advisable that the entities take expert opinions and consultation to prepare themselves well.

The introduction of corporate tax may also affect the start-up ecosystem in the UAE. While small businesses with low turnovers may be exempt from taxation, growth stage start-ups that are evolving rapidly may face tax obligations in their development phase. This can impact their ability to reinvest profits into scaling their operations and limit their ability to compete with tax-exempt startups in other jurisdictions.

While UAE may have introduced nine per cent corporate tax, it is one of the lowest amongst the globe and hence, it will still be the centre of attraction for businesses to establish and flourish as the country thrives on world class infrastructure and global connectivity.

The writer is Partner, MI Capital Services.